Schansberg: State Government Waste
by Eric Schansberg, Ph.D.
Stephanie Zepelin of WISH-TV in Indianapolis just aired a report, “Changes Made After I-Team Examines Millions in Lost State Property,” based on a database of state government assets that have gone missing. Her efforts help shine a light on a common problem for all levels of government.
Let’s start by acknowledging that this is also a problem for business. There are at least three key variables in play. First, with more layers of management, larger entities (private or public) will typically struggle more with various kinds of shirking — whether goofing off or stealing office supplies. In addition, environments in larger organizations are (or seem) less personal, so careful stewardship doesn’t resonate as strongly.
Second, holding size constant, we would expect the public sector to have more shirking, since everybody is spending someone else’s money. The same disincentives occur in the private sector. We wouldn’t expect employees to be as vested in profit, compared to owners and stockholders. But in the public sector, the gap is even greater.
Within any bureaucracy, there is an incentive to maximize budgets: spend it or lose it — and spend it so you can ask for more next year. Taxpayers are paying little attention to the purse strings. So, it’s far easier to blow money in a government bureaucracy, compared to a business with owners who will pay far more attention to the bottom line.
Third, the quality of the manager is relevant. How skilled is the manager in establishing a culture and systems that incentivize workers? Again, government will probably have more trouble here, given the prevalence of de facto tenure, strong bureaucratic incentives to stay out of trouble with moderation (and mediocrity), and fatter budgets that don’t promote as much concern about efficiency.
This gets to another question: What level of administrative cost is ideal to limit shirking and theft? Let’s start by noting that the optimal level of theft is not zero. If it’s zero, then you’re spending too much to mitigate theft; the costs outweigh the benefits of your efforts. But at least private sector firms have a strong incentive to do well on this issue. Failure can mean getting fired, lower profits and business failure.
How well will the government do with this question? As before, the pressure to do well is not nearly as high. Consider the administrative costs of Medicaid and Medicare. Some proponents brag about its “low” costs. But perhaps those costs are far too low: If they spent more, perhaps fraud and waste would drop by much more. There’s no way to know. But citing low administrative costs is not a satisfying claim.
The same observation relates to this database. Some agencies have reported more missing and stolen items. Family and Social Services reported the most: $6.27 million of the $17.1 million total over the six years in the data set. Transportation has the highest percentage of its budget (almost 6 percent), where Education and Corrections have very low percentages (far less than 1 percent).
When more malfeasance is reported, is this because those agencies have more trouble or are more diligent in policing the trouble? It’s not clear whether a long list is good news or bad news. Or maybe there’s something inherent in the work of certain agencies where assets are more likely to go missing. So, getting too excited about a particular agency, without more knowledge, is not wise.
The data also vary considerably by year — from $652,000 to $7.2 million. Since there’s not a trend toward more or fewer vanishing assets, the variance again leaves us uncertain about the extent of the problem.
Principles from Public Choice economics are at the root of these questions. First, as noted earlier, bureaucrats have incentives to maximize budgets and minimize hassles such as confronting employees.
Second, voters have little incentive to become educated and to take action against malfeasance in the public sector. In this context, Indiana taxpayers lose a few bucks per year. (Over the six years, the reported cost is $10 for the average family of four.) While irritating, it’s not the sort of evil that will change one’s vote. (Now imagine the federal government. Voters have even less incentive there, so we would expect even more waste.)
Third, it follows that politicians have little incentive to make this a political issue or the subject of reform. Politicians are appealing to voters who don’t know — or if they know, they don’t care all that much. It’s smarter politically to talk about Trump’s Twitter feed or Biden smelling children’s hair.
Not surprisingly, concern about this falls to a handful of investigative journalists and pointed-headed economists. And if they’re realistic, they realize that they can’t move the needle much. Two angles give us the most hope. First, when people hear stories like this, they will have less faith in government — how it really works in practice. Second, at the margin, people will want government to be more local than federal, where waste is relatively obvious and it’s relatively easy for voters to provide accountability.
Eric Schansberg, Ph.D., an adjunct scholar of the Indiana Policy Review Foundation, is professor of economics at Indiana University Southeast. He was featured on WISH-TV discussing this issue for a special report airing May 1.